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Tuesday, November 3, 2015

“GREECE JUST TAUGHT CAPITALISTS A LESSON ABOUT WHAT CAPITALISM REALLY MEANS”

BY JIM EDWARDS, BUSINESS INSIDER

Greece has effectively voted to default on its debt to
the International Monetary Fund (IMF) and the European Union, and it is a
massive defeat for Germany's Angela Merkel and the trio of creditors she led
that insisted there was no way out for Greece but to pay back its massive
debts.

The vote is huge lesson for conservatives and anyone else
who thinks this is about a dilettante government of left-wing idealists who
think they can flout the law while staging some kind of Che Guevara-esque
dream:

Wrong.

This is what capitalism is really about.

From the beginning, Merkel and the EU have operated from
the position that because Greece took on debt, Greece now needs to pay it back.
That position assumed — bizarrely, in hindsight — that debt works only one way:
If you lend someone money, that money is repaid.

But that is NOT how free markets work.

Debt is not a guarantee of future payments in full.
Rather, it is a risk that creditors take, in hopes of maybe being paid
tomorrow.

The key word there is "risk."

If you're willing to take the risk, you'll get a premium
— in the form of interest.

But the downside of that risk is that you lose your money.
And Greece just called Germany's bluff.

The IMF loaned Greece 1.5 billion euros, due back in
June, and Greece isn't paying it back. Greece has another 3.5 billion due to
the ECB in July, and that looks really doubtful right now.

This is how capitalism works. The fact that it took a
democratically elected government whose own offices are adorned with posters of
Lenin, Engels, and Guevara to teach this lesson to Germany is astonishing.

More astonishing still is that Merkel et al knew Greece
could not pay back this debt before these negotiations started. The IMF's own
assessment of Greek debt, published just a few days ago, states: "Coming
on top of the very high existing debt, these new financing needs render the
debt dynamics unsustainable ..."

Take a look at Greek gross domestic product. To pay back
debt, you have to have a growing economy. That's a basic law of economics. It's
how credit cards work. It's how mortgages work. And it is how
sovereign/central-bank debt works. But Greece's economy was never in a position
to benefit from debt, because it has been shrinking for years.

There is another key fact that the Greeks are keenly
aware of (but that everyone else has forgotten). This debt was initially owed
to private-investment banks, such as Goldman Sachs. But the IMF and the
European Central Bank (ECB) made the suicidal decision to let those private
banks transfer that debt to EU institutions and the IMF to "rescue"
Greece. As Business Insider reported back in April, former ECB president
Jean-Claude Trichet insisted that the debt transfer take place:

The ECB president "blew up," according to one
attendee. "Trichet said, 'We are an economic and monetary union, and there
must be no debt restructuring!'" this person recalled. "He was
shouting."

The result was that the ECB made this catastrophically
stupid deal with Greece, according to our April report:

And so there was no restructuring agreed for Greece. The
country paid off its immediate debts to the private financial sector —
investment banks, basically — and replacement debt was laid onto European
taxpayers. The government agreed to a package of harsh government spending cuts
and structural reforms in exchange for loans totalling €110 billion over three
years.

Trichet made a colossal, elementary mistake. The right
place for risky debt by definition is in the private markets, such as Goldman.
The entire point of private debt investment is that those creditors are
prepared for a haircut. The risk absolutely should not be borne by central
banks that rely on taxpayer money for bailouts.

Had Trichet made the opposite decision — and left the
Greek debt with Goldman et al — then Sunday's vote would be a footnote rather
than a headline in history. "Goldman Sachs takes a bath on Greek
debt." Who cares? Goldman shareholders and clients, surely. But it would
not have triggered a crisis at the heart of the EU.

Italy, Spain, and Portugal are now watching Greece closely
and thinking, hey, maybe we can get out of this mess, too.

Now, before we all start singing "The Red Flag"
and breaking out old videos of "The Young Ones" in celebration, let's
inject a note of realism. Greece isn't actually a country full of crazy
socialists who don't understand how the foreign-exchange markets work. In fact,
a huge chunk of the country's tax-collection problems stem from the fact that
there are two and a half times more self-employed and small-business people in
Greece than there are in the average country. And small businesses are expert
at avoiding tax, Greece's former tax collector told Business Insider's Mike
Bird recently.

Conservatives who hate paying taxes and urge small
businesses to pursue tax-avoidance strategies take note: Your dream just came
true in Greece.

If Greece were more socialist — more like Germany, with
its giant corporations that have massive unionised workforces paying taxes off
their payrolls — then tax collection would be a lot higher in Greece.

Greece is now most likely an international pariah on the
debt markets. It may have to start printing its own devalued drachma currency.
It will have no access to credit. Sure, olive oil, feta, and raki will suddenly
become incredibly cheap commodities on the export markets. Tourism in Greece is
about to become awesome. But mostly it will be awful. Unemployment will
increase as Greece's economy implodes.

But the awfulness will be Greece's alone. Greece is now
on its own path. It is deciding its own fate.